Social care levy: How will it affect young and old?

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The government has confirmed that there will be a UK-wide increase of 1.25% in national insurance contributions and dividends tax. Known as the health and social care levy, it will be introduced as of April 2022, initially to help reduce the NHS backlog and longer term to fund social care.

On making the announcement in the House of Commons on Tuesday, Prime Minister Boris Johnson pointed to the growing costs of adult social care, saying it would be “irresponsible to meet the cost from higher borrowing and higher debt”. 

Currently, anyone with assets over £23,350 pays for their care in full; one in seven people pay £100,0000 or more for their care, which No. 10 calls ‘catastrophic’. To tackle this, government has introduced an £86,000 lifetime cost cap, to come into force from October 2023.

Johnson says that this levy will “share the cost as fairly as possible between people and businesses”, but the levy could prove unpopular with voters as it breaks a key Tory manifesto commitment not to raise national insurance, income tax or VAT. A survey conducted by investment platform AJ Bell found that only 15% of people questioned said they would support an increase in NICs to fund social care reform.

What does it mean for the older generation?

The cost of social care has a substantial impact on people’s lives and can be burdensome. Johnson said tackling the issue is something “governments have avoided for decades”. The fact the government has finally presented a solution for funding of social care on Tuesday after years of delays was well received by some: “It is positive that today, after several decades of discussion by different administrations, the government has come forward with proposals,” said director of policy and advocacy at the Pensions and Lifetime Savings Association, Nigel Peaple.

After an initial backlash over rumoured plans to increase NICs, which are not paid by people over state pension age, the levy will be paid by workers of all ages. But, by including those over 66 who are still in work, the government is facing new criticism of penalising pensioners who need to work to make ends meet.

“The introduction of this levy is a kiss goodbye to one long-held advantage of continuing to work past the state pension entitlement age, which is that you wouldn’t have to pay national insurance contributions on what you earn,” noted head of pensions and savings at investment platform Interactive Investor, Becky O’Connor. “While many older workers will still not be earning enough to pay more national insurance, some, including those working full time to make ends meet, will see an increased bill.”

There are also concerns that the increased tax on dividend income will mean reduced returns for pensions funds, which Peaple said savers rely on in retirement. “With millions of people not saving enough for retirement, it is also important that the government tackles the question of pension adequacy,” he added.

What does it mean for the young?

To avoid accusations of intergenerational unfairness, the government has combined a rise in national insurance rates with one in dividend tax. But, according to the Association of Consulting Actuaries, young people in particular will need reassurance that their “continued generosity towards older generations” will have lasting benefits.

“The bulk of the working population are still under state pension age, meaning in reality this is a national insurance hike in all but name, and it is almost certainly still younger people who will pay the lion’s share of these cost,” said head of retirement policy at AJ Bell, Tom Selby.

Selby said the increase in dividend taxation “feels like a last-ditch attempt” to convince voters that everyone is sharing the responsibility for funding social care reform. By impacting both the young and the old, Selby said the big political risk is that the government may “simply anger everyone”.

Many are calling for the government to reassure younger people. Chair of the ACA pensions and savings adequacy group, Steven Taylor, said: “Given the additional costs will land on younger employees, it is now vital for government to demonstrate sustainable improvements to the care system, so that future generations can expect to rely on them in future years.”

With the majority of new money raised potentially going to support wider pandemic-related expenses, there are concerns about whether the new levy will be sufficient to meet growing care costs.

What impact will the health and social care levy have on pension contributions for older and younger generations?